NEWS

India’s Balance of Payments (BoP) position moved to a deficit of $9.6 billion in the quarter ended September (Q2), as widening trade deficit weighed.

BALANCE OF PAYMENTS

WHAT

• Record the transactions in goods, services, and assets
• Between residents of a country with the rest of the world for a specified time period typically a year.

COMPONENTS

• Current Account : Records exports and imports in goods, trade in services and transfer payments.
• Capital Account: Records all international purchases and sales of assets such as money, stocks, bonds, etc. It includes foreign investments and loans.

Note:

• The IMF accounting standards of the BOP statement divides international transactions into three accounts: the current account, the capital account, and the financial account, where the current account should be balanced by capital account and financial account transactions. In India, the financial account is included in the capital account itself.
• Grants might appear as component of capital account but are included in current account as they are unilateral, create no liability. Recipient does not have to give anything back in return.

BOP DISEQUILIBRIUM

Balance of payments equilibrium – When the demand for foreign exchange in exactly equivalent to the supply of it.BOP is regarded as being in disequilibrium when it shows either a surplus or a deficit.

Factors Causing disequilibrium –

Economic Factors:

• Large scale development expenditures generally increase the purchasing power, aggregate demand and prices, which results in substantially large imports.
• Cyclical fluctuations of general business activity such as boom and depression are one of the prominent reasons for balance of payments disequilibrium. Depression always brings about a drastic shrinkage in world trade, while prosperity stimulates it.
• Certain secular trends in the economy. For instance, in a developed country, the disposable income is generally very high and, therefore, so is the aggregate demand. At the same time, the production costs are also very high due to the higher wages. This naturally results in higher prices.
• Development of alternative source of supply, development of better substitutes, exhaustion of productive resources or change in transport routes and costs.

Political Factors: Political instability may experience large capital outflow and inadequacy of domestic investment and production. Factors like war of changes in the world trade routes could also produce similar difficulties.

Social Factors : Changes in the tastes, preferences and fashions, may affect imports and exports and thereby affect the balance of payments.

Monetary Measures

• Contraction of money supply is likely to reduce the purchasing power and thereby, the aggregate demand. It is also likely to reduce domestic prices.
• A country with fundamental disequilibrium in the balance of payments may devalue to currency in order to stimulate its exports and discourage imports to correct the disequilibrium. Devaluation makes export goods cheaper and imports dearer.
• The recipients of foreign exchange, like exporters, are required to surrender foreign exchange to the government/central bank in exchange for domestic currency
• Exports may be encouraged by reducing or abolishing export duties, providing export subsidy, encouraging export production and export marketing by giving monetary, fiscal, physical and institutional incentives and facilities.
• Imports may be controlled by improving or enhancing import duties, restricting imports through import quotas, licensing and even prohibiting altogether the import of certain inessential items.